French government bond interest rates fell 30 to record lows, less than 50 basis points above German government bond rates.

Until recently, the bond markets treated all euro sovereign debts as virtually equal, not raising interest rates on high debt countries until the possibility of default became clear.

Italian bond rates had already been falling before ECB President Mario Draghi announced the conditional bond buying plans.

Some sort of Brady bond to reduce and extend excessive sovereign debt will be necessary.

The market s reaction was to send Spanish government bond rates even higher.

But the immediate effect on long term bond rates has not been encouraging.

First, the ECB s renewed bond purchases must express the clear intention of reducing sovereign interest rates to sustainable levels, which are at least 200 basis points below their July averages. A high level German diplomat reportedly dismissed Spain s 6.5 7 interest rates recently, on the grounds that Spain borrowed at nearly the same rates in the 1990 s.

Noting the increasing voluntary use of collective action clauses in sovereign bond contracts by both developing and developed countries,

The healing process is also evident in Europe, though, unfortunately, it is effectively limited only to sovereign bond markets.

But, by early spring, bond rates for Spain and Italy were again approaching unsustainable levels.

Either way, interest rates would have to fall in order for world bond markets to clear.

While Europe has succeeded in stabilizing its sovereign bond markets, financial intermediation for small and medium size enterprises remains highly disrupted.

The ECB s announcement of a new program to purchase sovereign bonds has lowered market interest rates.

So why are an increasing number of developing countries resorting to sovereign bond issues? And why have lenders suddenly found these countries desirable?

Investors subsequent efforts to price in the risk of a eurozone breakup not the volume of sovereign debt caused bond yields to spike.

To the extent that this new lending is based on Africa s strengthening economic fundamentals, the recent spate of sovereign bond issues is a welcome sign.

The interest rates on the euro denominated sovereign debt of the twelve euro zone governments are all very similar.

When that happens, inflationary expectations will mount, long term government bond yields will rise, mortgage rates and private market rates will increase, and one would end up with stagflation (inflation and recession).

Clearly, the Fed s objective is to increase bond prices, in the hope that lower long term interest rates will propel corporate investment.

Countries contemplating joining the bandwagon of sovereign bond issuers would do well to learn the lessons of the all too frequent debt crises of the past three decades.

So what will happen when central banks start raising interest rates? In 1994, rising short term rates caused increases in long term rates and declines in long term bond prices that were at least double what standard models at the time were predicting.

But it is logical to consider that restoring the sustainability of public finances can have strongly positive effects on confidence and bond rates.

That is likely to be a money losing strategy unless an investor is sagacious or lucky enough to sell the bond before interest rates rise. If not, the loss in the price of the bond would more than wipe out the extra interest that he earned, even if rates remain unchanged for five years.

Under the OMT program, the ECB can replace foreign outflows from sovereign bond markets through direct purchases, putting Spain on par with non eurozone countries like the United Kingdom.

To ensure that their sovereign bond issues do not turn into a financial disaster, these countries should put in place a sound, forward looking, and comprehensive debt management structure.

Third, Germany s long term interest rates would be unaffected, because Germany would neither be guaranteeing the debt conversion scheme nor backing the ECB s bond issues.

Drastic action is needed to prevent European bond markets from drying up. Trichet has said repeatedly that current ECB interventions do not target interest rates.

That is likely to be a money losing strategy unless an investor is sagacious or lucky enough to sell the bond before interest rates rise.

And the international bond market has expressed its approval by cutting interest rates on Italy s ten year bonds to 4.8 , and on Spain s to 5.5 .

Lenders must suffer losses, so that they price sovereign risk more accurately in the future and make reckless governments pay higher interest rates.

WASHINGTON, DC The eurozone crisis unfolded primarily as a sovereign debt crisis mostly on its southern periphery, with interest rates on sovereign bonds at times reaching 6 7 for Italy and Spain, and even higher for other countries.

Extending this idea to sovereign debt, government bond covenants could stipulate that if a sovereign s debt GDP ratio exceeds a specified threshold, principal and interest payments to bondholders would be automatically reduced.

By February 2013, these ten African economies had collectively raised 8.1 billion from their maiden sovereign bond issues, with an average maturity of 11.2 years and an average coupon rate of 6.2 .

Like the World Bank, United Nations budget assessment payments are obligations of Member States, and accordingly United Nations obligations (i.e., the bond issue) would probably be eligible to be defined as quasi sovereign.

And, with slow growth, subdued inflation, near zero short term interest rates, and more QE, longer term interest rates in most advanced economies remain low (with the exception of the eurozone periphery, where sovereign risk remains relatively high).

But if they try to prick bubbles early on with higher interest rates, they will crash bond markets and kill the recovery, causing much economic and financial damage.

Bond offering

The result would be capital flight but to where? Many banks would have a similar problem a collapse in US Treasury prices (the counterpart of higher interest rates, as bond prices and interest rates move in opposite directions) would destroy their balance sheets.

If not, the loss in the price of the bond would more than wipe out the extra interest that he earned, even if rates remain unchanged for five years.

The resulting uncertainty could trigger more volatility, especially in bond markets, potentially impeding economic recovery (for example, by pushing up long term mortgage rates) or augmenting future inflation risk.

Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.

Finally, earlier this month, they decided to devote 100 billion to help Spain clean up its ailing banks. The market s reaction was to send Spanish government bond rates even higher.

These bonds may be seen as a hybrid of a single bond and a double bond, each bond in the ring identical to every other.

Real estate rental yields and stock market payouts are low, and real estate and stock prices may well fall as much as or more than bond prices if interest rates spike.

The healing process is also evident in Europe, though, unfortunately, it is effectively limited only to sovereign bond markets. The real economy remains under enormous pressure in several countries, as economies contract and unemployment remains alarmingly high.